In Mike’s opinion the latter is preferable because it allows the investor to shelter the gains in a tax-free account (i.e. IRA or 401K) and hold cash and fixed income investments in taxable accounts.  Furthermore, he points out that it’s worth evaluating the expense ratios of various funds of the same asset class to see where the investor can reduce investment expenses.

To demonstrate he provides this example:

How about an Example?

Sarah has decided that she wants the following asset allocation:

• 40% U.S. stocks
• 30% International stocks
• 30% Bonds

She has $50,000 in a taxable account at Vanguard, $150,000 in a traditional IRA also at Vanguard, and $100,000 in her 401(k) run by Fidelity. (So her total portfolio is $300,000, and she wants $120,000 in U.S. stocks, $90,000 in bonds, and $90,000 in international stocks.)

Sarah has the following investment choices in her 401(k):

• Fidelity Capital & Income Fund (expense ratio 0.76%)
• Fidelity Small Cap Stock Fund (expense ratio 1.25%)
• Fidelity Select Health Care Portfolio (expense ratio 0.88%)
• Spartan Total Market Index Fund (expense ratio 0.10%)
• Fidelity Strategic Income Fund (expense ratio 0.71%)
• Fidelity Blue Chip Growth Fund (expense ratio 0.94%)
• Fidelity International Growth Fund (expense ratio 1.90%)
• Fidelity Total International Equity Fund (expense ratio 1.79%)

Sarah could implement her desired 40/30/30 allocation in each of her accounts, or she could implement that allocation for the portfolio as a whole.

The “Multiple Portfolios” Approach

If Sarah views each account as a separate portfolio and uses her 40/30/30 allocation in each one, her holdings might look something like this:

Taxable account:
$20,000 Vanguard Total Stock Market Index Fund
$15,000 Vanguard Total International Stock Index Fund
$15,000 Vanguard Total Bond Market Index Fund

Traditional IRA:
$60,000 Vanguard Total Stock Market Index Fund
$45,000 Vanguard Total International Stock Index Fund
$45,000 Vanguard Total Bond Market Index Fund

401(k):
$40,000 Spartan Total Market Index Fund
$30,000 Fidelity Total International Equity Fund
$30,000 Fidelity Strategic Income Fund

The “Single Portfolio” Approach

In contrast, if she looks at everything as a single portfolio, she could do something more like this:

Taxable account:
$50,000 Vanguard Total International Stock Index Fund

Traditional IRA:
$40,000 Vanguard Total International Stock Index Fund
$20,000 Vanguard Total Stock Market Index Fund
$90,000 Vanguard Total Bond Market Index Fund

401(k):
$100,000 Spartan Total Market Index Fund

Why is the Second Portfolio Better?

The second portfolio is an improvement over the first for at least a few reasons:

• It uses only low-cost funds, whereas the first portfolio has 60% of Sarah’s 401(k) invested in high-cost funds just to meet the 40/30/30 allocation in that account,
• It’s more tax-efficient because it places all of her least tax-efficient holdings (the bonds) in a tax-sheltered account, and
• It has only five moving parts to monitor rather than nine.

And Sarah’s situation is relatively simple. For investors with more accounts (especially married couples) or more complex asset allocations (i.e., more than 3 distinct asset classes), the complexity resulting from using the target allocation in each account can be significantly worse.

If you are an investor or are a realtor who works with investors I have created a spreadsheet to use in analyzing the financial impact of of owning investment real estate.  After inputting the basics of the purchase, financing package, and rental income & expenses this spreadsheet will produce a detailed breakdown of the annual cash flow, net operating income, taxable income (loss), home equity, and wealth impact on an annual basis for 30 years.  Click THIS LINK to view a sample report.

Email directly if you’d like me to conduct a no obligation review of an investment property purchase on your behalf.

Among full-time, full-year wage and salary workers ages 21–64 (those with the strongest connection to the work force), 61.8 percent worked for an employer or union that sponsors a plan. This is down almost a percentage point from 2008 and almost 8 percentage points lower than the sponsorship high point of 69.4 percent measured in 1999.

Among full-time, full-year wage and salary workers ages 21–64, 54.4 percent participated in a retirement plan in 2009….down almost 6 percentage points from the high of 60.4 percent measured in 1999.

For most households employee-sponsored retirement plans play a significant role in providing post-retirement income since social security benefits will only replace a small portion of  pre-retirement income.  Lower participation can only result in fewer people being able to retire or more people relying on public assistance once they hit retirement age.

3. Never trust a person more than the market. People lie, the market does not.

5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.

9. The market is usually efficient and can not be beat. Exploit inefficiencies.

15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.

18. Don’t worry about the trades that you miss, there will always be another.

They mention in the podcast that consulting firm Accenture (ACN) briefly traded at $.01.  That would have been quite a buy considering it is trading at $41.00 currently.  If you were a lucky Joe who had an order in for 100 shares of ACN expecting to pay around $41.00 and then your confirmation comes back which shows you bought @ $.01 (or $1.00 total) you would have experienced a 1-day 4,000% return!

If a retirement saver begins at age 25-35 and saves regularly until retirement they’d need to set aside 10-13% of their gross income.

If a person delays a regular retirement savings plan until they reach the ages of 35-45 they’d have to set aside 13-20% of their gross income.

If a person waits until they are 45-55 they must save 20-40% of their income AND may have to delay retirement until the age of 70.

Let compound interest do the work for you!

If you are a stock market fan then the article is worth a read.